Control of top management teams in Spanish hospitals

Control of top management teams in Spanish hospitals Research executive summary series Volume 7 | Issue 1 Frank Hartmann Erasmus University The Netherlands

David Naranjo-Gil Pablo de Olavide University Seville, Spain

Key findings: • Strategic developments in hospital management support the need for updated accounting system use.

• Team diversity is related to the use of management control systems as a ‘learning machine’ rather than as an ‘answering machine’.

• Managers who are responsible for management control systems implementation should be trained in using those systems in an interactive and participative fashion.

• Management accounting systems should strike a balance between managerial characteristics and the organisational needs of the hospital.

Acknowledgements Researchers would like to thank CIMA General Charitable Trust for funding this project.

Overview of the project The medical industry across the western world is currently involved in processes of strategic and managerial re‑orientation. These processes originate from a number of demographic and structural developments, such as the progressive ageing of the population, autonomous increases in healthcare demands by citizens, the impact of new pathologies and technologies and the need to rectify supposed inefficiencies in the design and running of national healthcare systems. In several countries, such as Spain, formal legislation requires regional healthcare authorities to encourage hospitals to become flexible organisations that are more receptive to demands from the public, and to offer higher quality services at lower cost. This research project is based empirically on data obtained from top management teams in Spanish hospitals, and takes this setting as its primary focus. However, it is also aimed at developing knowledge that applies to a larger set of organisations, within which management teams are a dominant organisational element, and within which the control of such teams is considered a challenge.

Despite the importance of management teams in contemporary organisations, little is known about the proper way to control such teams nor about the processes that result as a consequence of using the Management Accounting and Control Systems (MACS) for the control of management teams. The literature on MACS in healthcare organisations has extensively analysed the role of accounting and professionalism in hospitals (Abernethy and Stoelwinder, 1990, 1995; Kurunmäki, 2004). Abernethy and Stoelwinder (1995) found that professional managers preferred informal controls for decision making. Abernethy (1996) argued that although physicians are being integrated into management structures in hospitals, they typically do not identify with managerial values and goals. She also found that effective implementation of management accounting systems requires a significant identification with managerial values and norms.

However, this orientation did not appear to be important for the effective implementation of non-accounting control systems (Abernethy, 1996). Kurunmäki (2004) found that medical education is shown to predispose managers towards emphasising patient care and health improvement rather than improvement of financial performance.

A MACS can be seen to comprise all techniques and routines of an organisation to ensure the proper

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behaviour of organisational participants (for example, budgets, ABC, Balanced Scorecard). These techniques provide managers with information relating to different performance characteristics which may be financial, nonfinancial, long‑term oriented or short-term oriented. Thus performance measurement systems should be viewed as important determinants of organisational and team effectiveness (Morhman et al., 1995). Although the reliance on (management) teams to accomplish organisational goals has increased dramatically during the last several decades, the literature shows that many organisations fail in realising the full performance potential of teams (Rowe, 2004; Scott and Tiessen, 1999). Research in accounting suggests that an important reason why organisational teams frequently fail to deliver improved performance, is that vertical MACS (for example rules and standard operating procedures, standard operating budgets) work less effectively in teams. These vertical MACS rely heavily on specification, measurement and evaluation of desired results, often overlooking the fact that as tasks become more interdependent, measurability of individual performance declines (Abernethy and Lillis, 2001; Towry, 2003). Furthermore, vertical MACS are accused of encouraging competition and conflict among employees instead of promoting the cooperative behaviour necessary in the contemporary environment (Abernethy and Lillis, 1995; Naranjo-Gil and Hartmann, 2005). As opposed to vertical control systems, horizontal control systems rely on social control mechanisms which take place within teams, such as peer pressure or mutual monitoring.

Understanding the underlying and intra-group mechanisms of horizontal control will help us to extend the application of MACS to groups rather than individuals and is a crucial part of management accounting and control. As yet however, it is unclear how the formal MACS can be used to evoke horizontal or informal control. This research project explores the interactive management style that Top Management Teams (TMTs) apply when using a MACS. TMTs are those top‑level managers who have to make the most important and critical decisions in the management of the organisation. An interactive use of MACS reflects the continuous interaction and exchange of information between higher level managers and organisational members (Simons, 1995) and across levels and functions, which is believed to encourage organisational learning, and stimulate creative responses to environmental changes.

Although this study is firmly set in the context of healthcare, its implications extend to a wide range of professional organisations, in which there is a potential tension between administrative and professional modes of leadership and control.

Objectives The objectives of this research project are as follows: • to analyse the relationship between top management team characteristics and the emergence of horizontal control in hospitals (professional organisations) • to analyse the effect of formal use of MACS on the emergence and functioning of horizontal control within management teams • to analyse how this effect originates in management team (demographic) characteristics • to analyse the effect of horizontal control on team effectiveness.

Main findings and their implications for practical application In total, 231 public hospitals were contacted and a questionnaire was sent to those showing interest in collaboration with the research study. This amounted to 202 hospitals (or 87.44% of the total population of hospitals contacted). We obtained 490 individual responses from TMT members, of which 457 responses appeared to be useful for analysis. From these responses, we were able to collect data on 86 full top management teams (the amount of teams for which all members participated).

The results demonstrate that TMT diversity is positively and significantly related to a more interactive use of MACS. Results also indicate a positive relationship between TMT diversity and horizontal control, although this relationship is not significant. Regarding the relationship between an interactive use of MACS and horizontal control, results show a positive and significant relationship. This is in line with Towry (2003) who argued that in contrast to vertical

control, horizontal control does not involve reporting to the next hierarchical level, but relies on team communication, discussion and peer-based control. Finally, a positive relationship was found between horizontal control and team perceived performance. Results show that the occurrence of horizontal control will depend on how TMT use MACS. Thus, diversity of team characteristics may stimulate the emergence of horizontal control, which has a positive effect on team perceived performance. TMT diversity may also lead to a greater variance in proposed decision making alternatives and creative responses to problems, which could enhance team perceived performance. TMT diversity is likely to cause TMT members to emphasize different aspects of information sets, and interpret them in different, and perhaps conflicting, ways. This suggests that the MACS will act as a ‘learning machine’ rather than as an ‘answer machine’.

MACS move beyond the cybernetic idea of fixed standards of performance and closed control model, and now accounts for the dynamic and unpredictable environment of the organisation, with its ambiguous, multiple, and constantly changing goals. Employees within such organisations may consequently be more motivated by incentives that reflect their perceived contribution to organisational goals, rather than by incentives based on short-term performance target (Hartmann and Vaassen, 2003).

In attempting to clarify these results, so as to gain a better understanding of the model, we analysed how the different backgrounds of TMTs were directly related to interactive use of MACS. Upper echelon tradition basically recognises the impact of managers’ demographic characteristics on their subsequent choices and behaviour in organisations.

In particular, systematic differences are expected between hospital TMTs with different age, tenure, education and functional backgrounds in their use of the MACS, which subsequently affects the horizontal control system.

Figure 1: The model and relationships analysed Team diversity

ns Horizontal control

MACS use

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Perceived team performance

The research distinguished between clinical and administrative TMTs, based on whether the majority of TMT members had a clinical or administrative background.

Clinical TMTs have a dominant background in medicine or nursing, which are areas that are strongly related to the core operational processes of the hospital. Administrative TMTs, instead have a dominant background in areas such as law or business, that are general to a larger range of organisations.

Interactive use of MACS was split on the basis of the median scores to create two groups: high interactive use of MACS (above median) and low interactive use of MACS (below median). Figure 2 shows that TMTs administrative background is related to a low interactive use of MACS, whereas a clinical background is related to a high interactive use of MACS. As clinicians have typically been educated and trained in the technical core activities of the organisation, they are socialised into giving priority to the needs of individual patients regarding care, the allocation of resources and the provision of (emotional) support. In contrast, administrators have been educated and have experience in general management and business administration, and therefore are more likely to stress the needs of the organisation, rather than the individual and rely more on formal and hierarchical forms of management.

We also observed in figure 2 that younger TMTs demonstrate a high interactive use of MACS. This could be attributed to the negative association between age and dynamic

lifestyle, and declining cognitive capabilities and energy levels associated with age (cf Hambrick and Mason, 1984; Finkelstein and Hambrick, 1996). Older managers are less able to evaluate new ideas quickly and to integrate them effectively in decision-making. Younger managers like to take risks and to initiate new projects that might advance their careers.

Figure 2 also shows that more tenured TMTs demonstrate a high interactive use of MACS. A plausible reason for this relationship is that managers who have spent a substantial part of their career in organisations are likely to have developed social networks and work routines.

We also analysed the relationships between horizontal control and TMT perceived performances (goals, timeliness, productivity and quality). Horizontal control was split on the basis of the median scores to create two groups: high horizontal control (above median) and low horizontal control (below median). TMT performances were also split at the median to create a high vs. low group. According to our expectations, results in figure 3 show that high horizontal control is related to higher TMT goals, productivity and quality. However, figure 3 shows that low horizontal control is related to higher TMT timeliness. This could be attributed to the higher specification of timetables set by the board of directors for evaluating management teams’ performance.

Figure 2: TMT characteristics and the use of MACS

Clinical Administrative TM

More tenure

Low interactive use of MACs

Less tenure

Younger Older

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High interactive use of MACs

Figure 3: Horizontal control and TMT performances

Low TMT

Low TMT

High TMT

High TMT High horizontal Low horizontal

High TMT

Low TMT

Lessons learned from the research This research project provides evidence on the use of MACS by hospital TMTs with different backgrounds, and analyses the effect of TMTs’ use of MACS on subsequent horizontal control implementation and team performance. As hospitals are reported to spend as much as 15% of their budget on gathering and using management and control information, understanding the use of MACS seems important, especially in situations where MACS may become vital in the implementation of new organisational and strategic policies. Overall, the analysis indicates that TMT background affects the use of MACS, which in turn appears to affect organisational control and policies adopted by the hospital.

TMTs with a dominant administrative background tend to use MACS less interactively than TMTs with a dominant clinical background. This suggests that clinical TMTs rather than administrative TMTs show behaviour that is better aligned with normative statements about the roles of TMTs in today’s hospitals. Shultz et al. (2004), for example, argues that hospitals are demanding a new role for clinical managers, requiring them to become more proactive and aiming at continuous improvement of healthcare delivery.

Iles (2001, p. 184) concludes that managers should engage with their staff in full transparency, recognising that unless the different kinds of expert knowledge (strategic and operational) are brought together, no satisfactory management solution will be reached. This requires that managers use the MACS in a more interactive way to discuss available information on critical aspects of the hospital’s strategy across all hierarchical levels and functions. This will

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Low TMT

High TMT

help hospitals to identify strategic uncertainties and to react appropriately and in a timely manner.

This research study acknowledges that measurement of team performance is unlikely to be straightforward. When hospitals have difficulties in specifying and measuring relevant dimensions of team performance, specific group processes could be used to enhance team performance.

MACS studies suggest that the successful adoption of flexible styles of management requires a combination of co-ordination, autonomy and decentralisation within the organisation, and a management control system that allows and stimulates fluent working relationships between hierarchical levels (Naranjo-Gil and Hartmann, 2006; 2007) and organisational functions (Abernethy and Lillis 2001).

Overall, the findings support the relevance of TMT diversity in bringing these desirable outcomes about. More specifically, they support the theoretical argument that diverse TMTs are more oriented to use MACS in flexible and adaptive ways in order to manage organisations successfully (Naranjo-Gil and Hartmann, 2004). We conclude that the interactive use of MACS is an important mediator of the relationship between TMT diversity and horizontal control in organisations’ top management teams. Given the wealth of evidence on the effect of top management team composition and functioning on organisational viability, the intermediate role of MACS systems has practical implications.

Although managers retain vertical control, their emphasis should shift to coaching employees, and facilitating relationships among all members in the organisation. Top managers should use information and allocate resources to

developing capabilities in others, improving processes, and looking for innovative ways to deliver value in hospitals. For middle managers and workers, an interactive use of MACS means that information and training are provided just in time on a need-to-perform basis.

Conclusions The practical implications of this paper can be summarised as follows. First, as TMT background affects horizontal control in hospitals through the use of MACS, managers appointed to implement such controls should be experienced or trained in an interactive and participative style. This may require that the hospital’s board of directors, who are responsible for appointing hospital managers, pay increased attention to the diversity among members of the top management team. A reduction in the administrative side of management may pay off as it allows clinical managers to use typical management information in broader ways than those determined by their education and functional experience alone. This latter implication may also be considered to be highly important given the technical complexity of contemporary MACS, which often require expert knowledge on their functional capabilities. Furthermore, this is not only important for the top managers, but also for middle management staff. Indeed, being confronted with the administrative side of management earlier in their career will make clinical managers more effective in building and using the management repertoire they potentially had.

In terms of general leadership, top managers should encourage clinicians at other levels to understand and formulate their own information demands, and to clarify what these demands mean for the design of the hospital’s MACS. Thus, hospital’s top managers may have to actively stimulate dialogue among clinicians and administrators to ‘demystify’ the MACS and make it more broadly owned and used. This will require TMTs to apply a style of supervision that stimulates agreement with the relevant professional staff about desirable financial and non-financial controls for monitoring, which will not ‘erode’ professional (clinical) discretion unnecessarily, and that balances the need to provide management with performance feedback while establishing control boundaries within which professional discretion can be exercised. Finally, all of this may require that the hospital’s board of directors pay increased attention to diversity and to the proper balance between managers’ characteristics and the organisational needs of the hospital.

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Although these results focus on a hospital setting, and use medical terminology, our findings have implications for professional organisations in general. The tension between administrative and operational modes of management and leadership form the core of the challenges in typical professional organisations such as consultancy firms, schools, universities and in R&D departments of commercial enterprises. Thus, the relationships tested and found in our sample concerning the diverse roles of MACS extend to those situations where this tension is considerable.

Finally, as with any empirical study, this research has its limitations. Some limitations are inherent to the survey method, such as the use of perceptual measures, purposive sampling and the common-method bias. Team performance was measured using managers’ self-ratings, which reduces objectivity, but objective measures for team performance are not easily available. Limitations may also be found in the lack of testing of the directions of causality due to the cross‑sectional nature of the study.

References and further reading Abernethy, M.A. and Stoelwinder, J.U. 1990. ‘The relationship between organisation structure and management control in hospitals: An elaboration and test of Mintzberg’s professional bureaucracy model.’ Accounting, Auditing & Accountability Journal 3(3): 18-33.

Abernethy, M.A. and Stoelwinder, J.U. 1995. ‘The role of professional control in the management of complex organisations.’

Accounting, Organisations and Society 20 (1): 1-17.

Abernethy, M.A. 1996. ‘Physicians and resource management: The role of accounting and non-accounting controls.’ Financial Accountability and Management 12: 141-165.

Abernethy, M. A. and Lillis, A. M. 2001. ‘Interdependencies in organisation design: A test in hospitals.’ Journal of Management Accounting Research, 13, 107-129.

Cohen, S. G. and Bailey, D. E. 1997. ‘What makes teams work: Group effectiveness research from the shop floor to the executive suite.’ Journal of Management, 23, 239-290.

Finkelstein, S., and Hambrick, D. C. (1996). Strategic leadership: top executives and their effects on organisations. St. Paul, Minneapolis: West Publishing Company.

Hambrick, D., and Mason, P. (1984); ‘Upper echelons: The organisation as a reflection of its top managers.’ Academy of Management Review, 9, pp. 193-206.

Hartmann, F. G. H. (2005). ‘The impact of departmental interdependencies and management accounting system use on subunit performance: A comment.’ European Accounting Review, 14, 329-334.

Iles, V. (2001). Really managing health care. Buckingham, UK:Open University Press.

Kandel, E. and Lazear, E. P. (1992). ‘Peer pressure and partnerships.’ Journal of Political Economy, 100, 801-817.

Kurunmäki, L. 2004. ‘A hybrid profession-The acquisition of management accounting expertise by medical professionals.’

Accounting, Organisation and Society 29: 327-347.

Rowe, C. (2004). ‘The effect of accounting report structure and team structure on performance in cross-functional teams.’ The Accounting Review, 79, 1153-1180.

Schultz F.C., Pal S, and Swan D.A. (2004). ‘Who should lead a healthcare organisation: MDs or MBAs?’ Journal of Healthcare Management, 49(2):103–17.

Scott, T. W. and Tiessen, P. 1999. ‘Performance measurement and managerial teams.’ Accounting, Organisations and Society, 24, 263-285.

Simons, R. (1995); Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal; Boston, Ma.: Harvard Business School Press.

Towry, K. L. 2003. ‘Control in a teamwork environment - the impact of social ties on the effectiveness of mutual monitoring contracts.’ The Accounting Review, 78, 1069-1095.

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Additional outputs of interest to the reader Naranjo-Gil, D. and Hartmann, F.G.H. (2004). ‘Leadership versus management accounting systems: An exploratory study in hospitals.’ Management Control & Accounting, 6, pp. 26-31.

Naranjo-Gil, D. & Hartmann, F. (2006) ‘How top management teams use management accounting systems to implement strategy.’ Journal of Management Accounting Research,18, pp. 21-53.

Naranjo-Gil, D. & Hartmann, F. (2007) ‘How CEOs use management information systems for strategy implementation in hospitals’, Health Policy, 81, pp. 29-41.

Researchers’ contact details Frank Hartmann Erasmus University Rotterdam Department Financial Management Room T8-59 P.O. Box 1738 3000 DR ROTTERDAM The Netherlands T. +31 (0) 10 – 4082790 E. fhartmann@rsm.nl David Naranjo-Gil Pablo de Olavide University Department Business Administration Room T7-12 P.O. Box 41013 Seville, Spain T. +34 954 34 98 47 E. dnargil@upo.es

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Appendices Questionnaires items Q1. TMT diversity • Age. • University degree and title.

• Years of experience as clinician/doctor at public hospitals.

• Years of experience as clinician/doctor at other healthcare organisations.

• Years of experience as managers in current hospital.

• Years of experience as managers in other healthcare organisations.

Timelines 1. This team meets its deadlines.

2. This team wastes time.

3. The team provides deliverables (e.g., products, or services) on time.

4. This team is slow.

5. This team adheres to its schedule.

6. This team finishes its work in a reasonable amount of time.

Quality

Q2. Interactive use of MAS

1. This team has a low error rate.

According to the following descriptions, please indicate the extent to which you use the Management Accounting and Control System, considering it as the whole set of management accounting and control techniques:

2. This team does high quality work.

• set and negotiate goals and targets

5. This team needs to improve the quality of its work.

• debate data assumptions and actions plans

Productivity

• signalling key strategic areas for improvement

1. This team uses too many resources.

• challenge new ideas and ways for doing tasks

2. This team is productive.

• involvement in a permanent discussion with subordinates • learning tool.

Q3. Team performance According to the following descriptions, please indicate the extent you agree in a Likert scale from 1 (very inaccurate) to 5 (very accurate).

Goals 1. This team fulfils its mission.

2. This team accomplishes its objectives.

3. This team meets the requirements set for it.

4. This team achieves its goals.

5. This team serves the purpose it is intended to serve.

3. This team consistently provides high quality output.

4. This team is consistently error free.

3. This team is wasteful.

4. Inputs used by this team are appropriate for the outputs achieved.

5. This team is efficient.

Q4. Horizontal Control According to the following descriptions, please indicate the extent you agree in a Likert scale from 1 (completely disagree) to 5 (completely agree).

• The monitoring of the activities of the team is made directly by peers at the same organisational level.

• The monitoring of the activities of the team is made directly by peers in the same working environment.

• The performance of the teams is monitored by comparing activities towards peers.

• Team performance evaluation is dominantly based on goals the team set for itself, rather than goals set by somebody outside the team.

• The monitoring of the activities of the team rely dominantly on specification, measurement and evaluation set for somebody outside the team.

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